Leave a Message

Thank you for your message. We will be in touch with you shortly.

The Main Reason Mortgage Rates Are So High

The Main Reason Mortgage Rates Are So High

Today’s mortgage rates are top-of-mind for many homebuyers right now. As a result, if you’re thinking about buying for the first time or selling your current house to move into a home that better fits your needs, you may be asking yourself these two questions: 

  1. Why Are Mortgage Rates So High?
  2. When Will Rates Go Back Down?

Here’s context you need to help answer those questions.

1. Why Are Mortgage Rates So High? 

The 30-year fixed-rate mortgage is largely influenced by the supply and demand for mortgage-backed securities (MBS). According to Investopedia

“Mortgage-backed securities (MBS) are investment products similar to bonds. Each MBS consists of a bundle of home loans and other real estate debt bought from the banks that issued them . . . The investor who buys a mortgage-backed security is essentially lending money to home buyers.”

Demand for MBS helps determine the spread between the 10-Year Treasury Yield and the 30-year fixed mortgage rate. Historically, the average spread between the two is 1.72 (see chart below):

Last Friday morning, the mortgage rate was 6.85%. That means the spread was 3.2%, which is almost 1.5% over the norm. If the spread was at its historical average, mortgage rates would be 5.37% (3.65% 10-Year Treasury Yield + 1.72 spread).

This large spread is very unusual. As George Ratiu, Chief Economist at Keeping Current Matters (KCM), explains:

“The only times the spread approached or exceeded 300 basis points were during periods of high inflation or economic volatility, like those seen in the early 1980s or the Great Financial Crisis of 2008-09."

The graph below uses historical data to help illustrate this point by showing the few times the spread has increased to 300 basis points or more:

The graph shows how the spread has come down after each peak. The good news is, that means there’s room for mortgage rates to improve today.

So, what’s causing the larger spread and making mortgage rates so high today?

The demand for MBS is heavily influenced by the risks associated with investing in them. Today, that risk is impacted by broader market conditions like inflation and fear of a potential recession, the Fed’s interest rate hikes to try to bring down inflation, headlines that create unnecessarily negative narratives about home prices, and more.

Simply put: when there’s less risk, demand for MBS is high, so mortgage rates will be lower. On the other hand, if there’s more risk with MBS, demand for MBS will be low, and we’ll see higher mortgage rates as a result. Currently, demand for MBS is low, so mortgage rates are high.

2. When Will Rates Go Back Down?

Odeta Kushi, Deputy Chief Economist at First American, answers that question in a recent blog:

“It’s reasonable to assume that the spread and, therefore, mortgage rates will retreat in the second half of the year if the Fed takes its foot off the monetary tightening pedal and provides investors with more certainty. However, it’s unlikely that the spread will return to its historical average of 170 basis points, as some risks are here to stay.”

Bottom Line

The spread will shrink when the fear investors feel is eased. That’ll mean we should see mortgage rates moderate as the year goes on. However, when it comes to forecasting mortgage rates, no one can know for sure exactly what will happen.

Recent Blog Posts

Stay up to date on the latest real estate trends.

SF Market Update - March 2025

Single-family homes continue to be a hot commodity, while condos continue to sit on the market.

East Bay Market Update - March 2025

Inventory levels are increasing drastically throughout the entire East Bay, with the area seeing over 40% more active listings than this time last year.

The Best Week To List Your House Is Almost Here – Are You Ready?

If selling your house is on your to-do list this year, the time to start prepping is now. That’s because experts say the best week to list your house is coming up fast.

What You Need To Know About Homeowner’s Insurance

Homeowner’s insurance is a must to protect your home and your investment. But with costs rising, you’ll want to do your homework to balance the best coverage you can g… Read more

Headed Back Into the Office? You May Decide To Move

A growing number of companies are requiring employees to return to the office. And that’s leading some people to make decisions about where they live and if they need … Read more

SF Market Update - February 2025

Mortgage rates have ticked back up to roughly the same levels, as they were at prior to the Fed issuing its first rate cut in September.

East Bay Market Update - February 2025

Inventories are one of the most important leading indicators of price trends, and we’re seeing quite the increase in inventories in the East Bay in terms of both singl… Read more

The Perks of Buying a Fixer-Upper

If you’re willing to roll up your sleeves (or hire someone who will), buying a house that needs some work could open the door to homeownership.

3 Reasons To Buy a Home Before Spring

You might even be thinking, “Should I just wait until spring when more homes hit the market and rates might be lower?” But here’s the thing, no one knows for sure whe… Read more

Let’s Talk

You’ve got questions and we can’t wait to answer them.